Introduction The Indian economy and the importance of family-owned groups

The Economy of India is the ninth largest in the world by nominal GDP and the fourth largest by purchasing power parity (PPP)[1]. The country is one of the G-20 major economies and a member of BRICS. The country's per capita GDP (PPP) was $3,408 (IMF, 129th in the world) in 2010, making it a lower-middle income economy[2].

As a result of the financial crisis of 2007–2010, coupled with a poor monsoon, India's gross domestic product (GDP) growth rate significantly slowed to 6.7% in 2008–09, but subsequently recovered to 7.4% in 2009–10, while the fiscal deficit rose from 5.9% to a high 6.5% during the same period[3]. India’s current account deficit surged to 4.1% of GDP during Q2 FY11 against 3.2% the previous quarter. The unemployment rate for 2009–2010, according to the state Labour Bureau, was 9.4% nationwide[4]. As of 2010, India's public debt stood at 71.84% of GDP which is highest among BRIC nations. The latest GDP growth figure slipped to 6.9% and industrial production numbers just released, on December 12th, showed a decline of 5.1% compared with the previous period[5]. Inflation and capital flight are two clear factors that have hurt the Indian economy. First, inflation has stayed over 9% since December 2010, and wage inflation is also on the rise. The Reserve Bank of India (RBI), the country's central bank has been hiking interest rates since March 2010 to curb inflation[6].

Family owned groups constitute the backbone of the Indian economy. Sixty-six of Business India’s Super 100 companies are family-run. According to Business Today, family-run businesses account for 25% of India ink's sales, 32% of profits after tax (PAT), almost 18% of assets and over 37% of reserves. In 1947, 18 families owned nearly every company of consequence in Indian economy. In 1997-98, as the global economy closely watched, 461 of the 500 most valuable companies in the country were still controlled by 50 families (Agarwala, 2001). In the post-liberalized India Inc., as reported by Business World (2007), 17 out of the 30 companies listed in the benchmark Bombay Stock Exchange (BSE) Sensitive Index (Sensex) are family owned. Thus, it is the business family that remains the most powerful and enduring entity in corporate India from its very inception[7].

A study conducted back in 2003, confirmed this notion. “Businessmen the world over may be handing over the reins to professionals, but for Indian entrepreneurs, retaining control over the business and passing it on to the next generation is still the driving passion. This is a key finding of a new global study on family businesses by consultancy firm Grant Thornton. The study says that as many as 46 per cent of Indian businessmen feel that their successor should come from within the family. In comparison, only 22 per cent of North Americans and 24 per cent of Europeans subscribe to this view”[8].

It has been observed that :
- Just 13% of the Family business survive until 3rd generation & only 4% go beyond third generation
- One third of family business families disintegrate because of generational conflict[9].

Therefore for the oldest such as Aditya Birla, Tata and Bajaj, which stretch back over three or more generations, their longevity is impressive. Second-generation firms include Reliance Industries, India’s biggest private firm, run by Mukesh Ambani, who split from his brother Anil in 2005, and whose late father’s rise from petrol-pump attendant to billionaire [10]. First-generation firms include the winners from sunrise industries such as telecoms and computing, which boomed in the late 1990s and early 2000s—Bharti Airtel and HCL, a technology firm, being two fine examples respectively. More recently the ranks of first-generation firms have been swelled by the Adani group, big in ports and power, and GMR, an infrastructure firm based in Bangalore. A final category is the offshore Indian family group. The Hinduja brothers, who run everything from Ashok Leyland, a truckmaker in India, to a Swiss bank, are partly based in London. Vedanta, a big natural-resources outfit, shifted there in 2003. Such firms mix Indian and foreign activities. It is tempting to include Mittal Steel, based in Europe and run by Lakshmi Mittal, in this group. But he is better regarded as an escapee from India who made his fortune only after leaving the country as a young man.
Most of these groups have two shared characteristics. First, they are relatively complex. Although many have simplified since 1990, most are still tricky, with intricate chains of holding companies and subsidiaries. Second, they are conglomerates, often with one or two core activities and a long and growing tail of others.

India’s love of conglomerates can partly be explained by history. Before independence in 1947, British companies often operated with a local managing agent who had his fingers in lots of pies. Alternatively, during the socialist era between 1947 and 1991, Indian firms faced heavy restrictions from the state and tended to expand in any direction where they could get air. Another explanation is cultural. Taking a sample of 16 of India’s big houses, nine came originally from the Marwari and Bania communities, famous for their trading nous. Perhaps these cultural roots come with a preference for how to organise firms. Even tax might be important: one baron says that capital controls make it hard to get family money abroad legally. If it has to stay at home, better to put money into a new business than a bank account that returns less than inflation.

Another better explanation is India’s soft state. Courts can take years to make their minds up, so contracts are hard to enforce. Infrastructure is often poor, supply chains tricky, red tape a hazard, and markets for people, materials and finished goods unreliable. Tarun Khanna and Krishna Palepu of Harvard Business School coined this idea in a 1997 paper. In these circumstances it makes sense to do things yourself. Such vertical integration even happens at Infosys, which generates much of its own electricity and tops up the education of new recruits. The Adani group will soon mine coal in Australia that is delivered to its own port in Gujarat and used partly to fire its own power stations[11].

In India the institution of the family firm is entrenched, but there is constant turnover. Who is on top at any point “never stays the same”, says Adi Godrej, the head of the Godrej group. The numbers back this up. For family firms in the top 100, overall returns on equity look similar to those of state-owned and institutionally owned firms, indicating that family firms are not making supernormal profits. This year an IMF study concluded that although such firms were as dominant as ever and the number of new entrants had fallen, competition was still lively.

In other countries family conglomerates and corporate federations have been merely a phase of capitalism, and have declined on their own. This can happen in three ways. They can become flabby and lossmaking, as in the case of Japan’s keiretsu. The need to raise outside capital to finance growth can slowly dilute the family’s stake to insignificance. Or they can run out of credible heirs. The last two factors are common in America and Europe, where Hilton, Cadbury and others have evolved into companies run for institutional investors.

Within these examples of family businesses, there is no other Indian conglomerate which quite dominates the lives of middle-class Indians the way Tata Group does with its 96 companies, seven business divisions. Its turnover of $21.9bn, unsurprisingly, equals nearly 3% of India's gross domestic product (GDP). In the words of one BBC journalist « if you wake up in India, you are likely to sip Tata tea, make early morning calls on your Tata mobile phone and take a Tata sedan to work. There is a good chance that you will be wearing a Tata watch or shoes sold by Tata as well. Back home, you may be leaving your wife and children surfing more than 100 channels on the local direct-to-home television system launched by Tata along with Star. Your children may work in any of the Tata companies which already employ nearly 250,000 people or opt for higher studies at a science or social sciences school run by the Tatas. If you fall ill, you might head to the nearest Tata hospital[12].

Historically India’s large, family-run groups have filled the country’s capital voids by serving as the best—and most easily obtainable—source of capital to entrepreneurs. This role became even more important as the Indian government began deregulating the economy in 1991. India’s family groups, also called promoter groups, moved aggressively to take advantage of deregulated markets and quickly became the country’s economic backbone. Take the legendary Tata Group. It began life in the early 1900s as a steel manufacturer, but has since expanded into businesses as diverse as wireless communications (Tata Wireless), information-technology services (Tata Consulting Services) and automotive manufacturing (Tata Motors). Each of these businesses were started, funded, and grown entirely by capital from within the Tata Group. In fact, when the Tata Group decided to build the world’s first Rs. 1 Lakh ($2,500) car, it funded the entire activity from internal resources.
Each of these Tata businesses now has a multi-billion dollar enterprise value. India’s largest family groups, such as the Birlas, Ambanis, Hindujas, Munjals, Bajajs, Godrejs and many others, all have followed a similar pattern, using their own resources to grow and prosper. Looking at the largest and most profitable public companies in India today is a testament of the success of family-run groups and their strategy of self-reliance[13].

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[1] "India", International Monetary Fund. Retrieved 2011-05-26
[2] "Country and Lending Groups". World Bank. Retrieved 2011-11-20.
[3] Economic Survey 2010, pp. 1–2
[4] "Report on Employment & Unemployment Survey (2009–10)". Bureau of Labour Statistics, Indian Government. 8 October 2010. Retrieved 2011-01-17
[5] The Economist, ‘India’s slowdown: the case for the defence’, 7th January 2012

[6] http://www.isb.edu/FamilyBusinessConference/FamilyBusinessManagement.pdf
[7] www.rediff.com
[8] www.scribd.com/.../13/CONTRIBUTION-OF-FAMILY-BUSINESSES
[9] The Economist, ‘The Bollygarchs ‘s magic mix’, 22nd October 2011
[10] The Economist, ‘The Bollygarchs ‘s magic mix’, 22nd October 2011
[11] BBC, Soutik Biswas, ‘Tata- an integral part of Indian life’, 31st January 2007
[12] http://www.bvp.com/downloads/india/whitepapers/BVP_India_Family_Paper_Oct_2010.pdf